5 reasons why new businesses often fail

Any person who has started a business has had the intention to be successful, to create value and to provide a financial return on the risk, effort and time put into the business.

However, no matter how strong these intentions are, approximately 80 percent of all start-up businesses will fail in the first five years.

In order to be successful, it is just as important to understand what caused failures in these businesses as it is to have a picture of what a successful business will look like. By understanding the causes of failure, it will help to avoid failure.

For each of the following mistakes made while building a business, it will make success less likely.

1. The leading cause of business failure in early stage businesses is the lack of strategic planning.

When passion and energy are so strong around a product or idea to start a business, it may seem tedious to sit down and write out a detailed plan for the next three years.

It is far easier to rationalize that launching into the marketplace is the most difficult step and that it will be easier to change direction once the business is up and running.

However, as the well-known college football coach and expert motivator Lou Holtz said, "The reason most people fail is that they don't know where they are trying to get to."

The operating output of the strategic plan will be the company's business plan for the first three years of business and will reflect the purposes and intent for being in this business.

But it is just as important to recognize that as the business develops, changes will occur; and so at intervals the original business plan will need to be modified to maximize impact in the marketplace.

These changes can be made by measuring against specific plans laid out in the original business plan.

Without being able to measure performance against a detailed plan, there will not be specific indicators to know that change is needed.

2. Another critical cause of failure is the lack of providing effective awareness and exposure of the new product or service to the targeted audience.

It is very rare that word-of-mouth will suddenly bring customers to the door for new products or services — proactive marketing and communications are absolutely necessary to be successful.

Even "the better mousetrap" will not sell if the potential customer doesn't know about it.

On the other hand, it will also lead to financial failure if these marketing expenditures are broadly spent against the general marketplace and not efficiently spent against the identified prospect target audience.

In most cases, and particularly in today's tough economic climate, consumers do not respond to products or services if they don't have a specific need for that product or service.

3. A longer term and often unrecognized cause of business failure is not understanding the value of building customer loyalty.

Customer loyalty requires a proactive strategy to develop an approach to service excellence that creates an experience for customers to keep coming back for more. Equally important is for existing customers to provide referrals that will generate an ongoing stream of new customers.

4. Another cause of business failure is the lack of innovation, of accepting the status quo, of not being willing to take calculated risks in testing new business approaches.

In business, you either grow or you die -- there is no status quo.

The marketplace will always change over time, new competitors will enter the category, competitors will bring new products or services to market, cultural changes occur with new generations becoming consumers.

Be willing to move beyond the way it's always been.

5. A surprisingly overlooked critical cause of business failure is losing sight of financial fundamentals and even a lack of understanding of what is needed for a successful financial model of the business.

This is frequently exacerbated when a business has sufficient success to generate rapid growth that can create severe cash flow strains.

Most early stage businesses start with rudimentary bookkeeping that is rarely kept up to date.

And then there's the lack of understanding the need for financial forecasting as a tool for financial management of the business by modeling the future financial expectations to provide a basis for intelligent decision making.

It is also important to be aware of and to avoid critical reasons why other early stage businesses have failed:

• The failure to have a written strategic road map.
• The failure to launch the business with a lack of proper exposure to the prospect target audience.
• The failure to understand the need to build customer loyalty.
• The failure to incorporate innovation and change in operating processes.
• The failure to measure financial performance against a pre-established successful financial model of the business.

Iain Macfarlane is the president and founder of BizCOACHING & Associates in Madison, a franchise of ActionCOACH Business Coaching. He was named "Coach of the Year 2005."